Friday, August 31, 2012

Previously.ThermoLife and Gaspari, competing suppliers
of dietary supplements, accused each other of false advertising and unfair
competition.In counterclaims, Gaspari
alleged that ThermoLife disparaged its products with statements on ThermoLife’s
website and on third-party websites that Gaspari products were mislabeled,
underdosed, spiked, poorly formulated, and pixidusted, and also made
disparaging statements about Rich Gaspari, Gaspari's president.

The court found that, even under Rule 9(b), Gaspari had
sufficiently alleged specific falsity as to the statements on ThermoLife’s own
website, e.g., that ThermoLife falsely claimed that Gaspari’s products didn’t
contain effective doses.

Mostly, ThermoLife argued that its blog
post on a third party site wasn’t actionable.The court disagreed.The statement that Gaspari’s products were
“poorly formulated and pixidusted” was within the scope of the Lanham Act, and
wasn’t mere puffery.“[T]he statements
reflect a relatively straightforward, if subjective, report of the Court's
order related on a previous motion to dismiss.”The court thought that the picture and the headline “Things look bleak
for Gaspari Nutrition after Federal Judge allows all ThermoLife[’]s claims
against [Gaspari] for selling steroids as supplements to move forward” could
possibly be considered satire, but the article itself couldn’t be understood
that way. The picture, which seems less satirical than barely comprehensible to me:

The unfair competition claim also survived, except that
Gaspari’s general allegations of “use of illegal means” were insufficient.

There's also Super Mario and some prominent names featured in other art. The satire/parody distinction, which wasn't even offered as a bright line in Campbell, doesn't make sense of how people communicate with popular culture.

AdWords allows advertisers to display ads on Google and
other sites.AdSense allows third
parties to host/publish Google ads on their websites; the third parties receive
a share of Google’s per-click revenue.Woods argued, among other things, that Google secretly allowed certain
partners to be exempt from AdSense quality policies, forcing advertisers to pay
for accidental and meaningless clicks worth less than Google charged.In addition, Google allows advertisers the
option of specifiying geographic locations for their ads.The help link for the question “In what
geographical location do you want your ads to appear?” during the signup
process said: “You can target your ads to almost any set of locations,
including countries, territories, regions, cities and custom areas. For
example, you could target specific regions within the United States and a few
large English-speaking cities in Europe. You can view or edit your targeting
options from the Settings tab for your campaign. Learn more about location
targeting options. [hyperlink]”

Woods selected “Metro area: Ft.
SmithFayetteville–Springdale–Rogers AR, US,” but discovered that Google distributed
his ads to users outside this location.He alleged that the location statements were fraudulent, in violation of
California’s UCL.

The court got rid of Woods’ contract-based arguments, and
the alleged UCL violations stemming from them.Woods alleged that Google’s AdWords statements were fraudulent because
they were likely to deceive advertisers into believing that Google would give
them a discount for all clicks on sites that were less likely to convert than
clicks from google.com, instead of just a subset of those clicks, and that
Google would apply AdSense policies to all sites.

Google argued successfully that Woods lacked standing. Under
the UCL, a representative plaintiff must personally have lost money or property
because of his own actual and reasonable reliance on the allegedly untrue or
misleading statements. The contract itself expressly states that “[n]o
statement or promises have been relied upon in entering into this Agreement
except as expressly set forth herein,” and that “any conflicting or additional
terms contained in any other documents ... are void.” Google maintained that,
as a practicing attorney, Woods was a sophisticated party in a position to
understand the no-reliance clause.

Reasonable reliance is ordinarily a question of fact, but
can sometimes be resolved as a matter of law.So here: in light of his sophistication as a lawyer, Woods could not
have reasonably relied on the AdSense policies.As for the pricing statements, reliance might have been justified
because those statements were used to interpret an ambiguous clause in the
contract.But Woods didn’t allege facts
showing that the pricing statements were untrue or misleading: the pricing
statements said Google would give a discount on certain clicks from Display
Network pages, but Display Network was specifically defined and didn’t cover
Google’s entire advertising empire.Woods failed to allege that Google failed to apply the pricing formula
to Display Network pages.

The location targeting claim fared better.Woods alleged that he expected that, by
choosing his location, he’d get ads only within that location, but Google
nonetheless distributed the ads and charged him for clicks outside that
area.Google argued that the complaint
failed to show that it had made any representations, guarantees, or other
commitments that all of Woods' ads would appear within only certain areas of
Arkansas, and that other web pages disclosed the possibility of ads appearing
to users elsewhere.But Google didn’t
present those web pages to the court or otherwise convince it that these
statements wouldn’t mislead a reasonable consumer.Misleadingess is, anyway, usually a question
of fact.

Woods also pled injury sufficient to confer standing: Google
“distributed over $20.00 of exemplary clicks that were in violation of Woods'
Campaign Settings,” and he also alleged that if he’d known of the geographic
scope of the ads he wouldn’t have advertised with Google. (Wonder if that last allegation can survive
summary judgment.)

Since this opinion comes from a motion to alter or amend the
judgment, it skips over a lot of things, as will I, but one part of the holding
is of significant interest—read on for a cautionary note on drafting a license
to use a name.Bart had a license from
Mercado (whose continuing validity was in question) to use Mercado’s name and
likeness. When a dispute arose, Mercado sued for, among other things, violation
of his publicity rights.

The court found that Bart only had the right, pursuant to
the license, to use Mercado’s name and likeness for existing or new materials
related to Mercado’s psychic and astrological services.New materials were defined as materials “relating
to Mercado's psychic and astrological services of whatever nature whatsoever,” but
that turned out to be insufficient.

In the modern economy, services can change fast.Bart’s co-defendant used Mercado’s name and
license for waltermercado.net, providing interactive astrological and psychic
consultation through the internet, including some daily horoscopes published
under Mercado’s name as well as live psychic readings. Likewise, co-defendant
Waltervision entered into a contract allowing another company, SCI, the right
to use the Mercado mark in connection with various 800 numbers, prepaid paid
calling cards and pay per call live astrological and psychic readings through
900 numbers, including the creation of a new website, Telewalter.com, and the
use of Mercado's name and likeness to advertise the astrological and psychic
services being sold.SCI produced gift
cards featuring Mercado's name and likeness and a press release for the launch
of “Walter Mercado's Psychic and Astrology Network, starring Walter Mercado.”Defendants also operated an
SMS/text-messaging service using his name and likeness with horoscopes not
created by Mercado.Co-defendant Walter
Int’l published horoscopes using Mercado’s name and likeness in a Mexican
newspaper; Mercado didn’t write them.

The court found that these weren’t New Materials under the
contract because they didn’t relate to Mercado’s psychic and astrological
services.“This is not necessarily
contingent on Mercado providing personal services to Bart, but New Materials
must relate to psychic and astrological services provided by Mercado himself.”The contract’s use of the term “produce” didn’t
mean “create,” since the contract itself was written “in a manner that
distinguishes between the two verbs. The Preexisting Materials provision uses
the verbs ‘created or originated,’ while the New Materials provision does not
use the verb ‘created.’”Thus, the right
to develop new materials “contemplates a product already in existence that is
related to Mercado's psychic and astrological services. It does not give Bart
the right to create new materials using Mercado's Name and Likeness. If the
parties had intended to grant Bart such a right, the parties could have used
the verbs ‘create’ or “originate,’ as they did in the Preexisting Materials
section.”

Because of the limitation of the contract, even though
defendants might own the mark, they
were unable to expand the scope of their services without violating Mercado’s
right of publicity. I leave as an exercise for the reader how this might have been fixed, from Bart's perspective.

When the court turned to the false advertising claims,
matters grew even more complicated.Bart,
as owner of the mark, might have the right to use the mark to advertise its services even if it didn’t have the right to
use Mercado’s name and likeness.The court considered the mark to be “a type
of endorsement.”Bart, as owner, could
use its own mark as an endorsement for advertising purposes without becoming
liable for false endorsement.Endorsement doesn’t require actual involvement in or development of the
sponsored product.(What about the FTC
Guidelines, then?)

However, “endorsing a product and saying a product is created
by the endorser are two different things.”Thus, even as owner, Bart couldn’t advertise Mercado as the source of its products, except for the
preexisting materials and the new materials that were in some way Mercado’s
work product.(Great example for Mark
McKenna’s investigation of the meaning of Dastar.)For example, the website featured Mercado's
photo and signature with a message that read “Live consult with my most
profound psychics.”The court ruled that
defendants couldn’t use this photo and signature to promote the website, nor
could they refer to “Mercado's most profound psychics.”Instead, if they owned the mark, they could
use it to refer to the business—e.g., “‘profound Walter Mercado psychics’—but
Bart cannot say it is selling the work product of Mercado.”(Are consumers likely to understand this
distinction?What about the domain name?)

Likewise, ads for the SMS service couldn’t use Mercado’s
name and likeness.Further, defendants
couldn’t “advertise the SMS Services as if Mercado himself were authoring the
horoscopes and messages or has personally selected the psychics authoring the
same.… However, advertising consults from ‘Mercado's powerful psychics’ or that
consumers ‘will be connected with the good energy of Walter Mercado’” would be
allowed if Bart owned the mark. (Hunh? How is that not using his name?)

Mercado also claimed a violation of his moral right to avoid
attribution.But Puerto Rico law only
provides an attribution right, not a right against attribution for work not the
author’s: “[t]he author or beneficiary of a literary, scientific, artistic
and/or musical work has the right to benefit from it, and the exclusive
prerogatives to attribute to him/herself or retract its authorship, dispose of
his/her work, authorize its publication and protect its integrity ...”

Alexander Sebastian Dent, Understanding the War on Piracy,
or Why We Need More Anthropology of Pirates, 85 Anthropological Quarterly 659
(2012):

[P]iracy is not an individualized
practice, but is, rather, a group affair, despite the fact that all the current
Internet pirates might be acting by themselves in lonely rooms in Russia,
China, the college dormitories of New Jersey, or other subversive locales. A
cat-burglar (or perhaps an overly-aggressive anthropologist) is a thief, not a
pirate….

Finally, at the core of piratical
practice lies a specific circulatory ideology in which objects and ideas are
“supposed” to move through channels which signal attention to selected aspects
of their production—an inter-discursive orthodoxy of brand-patent-trademark-copyright.
When piracy is used pejoratively, this invocation smacks of an attempt to
protect the commodity’s “secret”—its concealment of its character as a
concatenation of social relations. When piracy is invoked positively, it sounds
very much like a Marxian attempt to peel back the veil and show us all what’s
“really” behind the curtain—a set of extractive and monopolistic practices
where “real” producers aren’t properly remunerated. We can, in this way, see
that piracy arises from an anxiety that the idealized alignment of intention
with reception—a sort of fantasy of unmediated consumption such that an object
or idea is received in a controlled and “clean” way—is being broken.… Both its
policing and its practice seek to govern excesses, sloppiness, and the
underperformance of a given circulatory system.

[N]on-elite youth, producers explained,
find brands and commodities from abroad aesthetically pleasing. The brand
garment for export is, by virtue of that very fact, a reasonable guarantee that
an inspired version of it can be sold for profit....

In short, this belief that brands
guarantee profits isn’t held to because producers see “demand” for
such-and-such brands among young, non-elite men (their primary market); nor is
it held because producers closely follow the sales of such and such brands in
the West or among the Indian elite because, by and large, they don’t. Rather,
this belief is grounded in an aesthetic of brandedness that producers believe
that they share with their non-elite, youth consumers. That is, the branded
form has that look and style which is performative of statusful
modes of youth masculinity. Thus, such forms will sell, while “plain” ones without brand-esque names
and designs won’t. And again, this is independent of brand identity or
authenticity as such. As producers often justified the liberties that they
would take with the branded form, “the customer doesn’t know the difference,
and if they do, they don’t care.” And as I found out, often producers
themselves didn’t know about the brands they were copying or using for
inspiration, except that they were brands (and sometimes not even that). As one
producer noted: “we don’t care what the brands are. We make them because they ‘move’ [sell] on the market. There is no
need to know the brands, because consumers don’t even know the brands.”

… [B]rands are ubiquitous in local
Tamil markets, and thus seemingly in “demand.” And yet, there is an
insensitivity—an active indifference, even—towards those very same brands.

… If, indeed, branded garments in
local, non-elite Tamil markets are not reckoned as instances of particular
brands, but as participating in an aesthetics of brandedness, legal doctrines
like “consumer confusion” and more recent notions like “disassociation,”
“dilution,” or “tarnishment” of brand image do us no service in understanding
the local consumption, circulation, or production of these garments. The brand
surfeits that we have discussed confuse no one as to their origin. In fact,
they are not even read as indexing any (brand) origin except for some vague
notion of exteriority (the “foreign”). And from this it follows that they
cannot dilute associations attached to particular brands. Without the
indexicable brand identity as a knot to tie together a variety of brand
“meanings” or associations, there is nothing to dilute, and no one for whom it
can be diluted.

Millennium moved to dismiss Ameritox’s false advertising,
tortious interference, and unfair competition claims; the interesting part is the false advertising aspect.

The false advertising covered multiple types of conduct,
including printed ads—billing letters—provided by Millennium to providers for distribution
to patients.Millennium allegedly
informed potential customers that its corporate policy was to not collect from
patients the difference between the amount Millennium billed for its services
and the amount the patients' insurance companies agreed to pay; Millennium also
advertised that it would not require patients to pay deductibles or co-pays. These
ads were allegedly false and misleading to three groups: those enrolled in
Medicare who are not required to pay any co-pay or deductible; those enrolled
in Florida Medicaid who are required to pay only a $1 co-payment; and those
enrolled in private insurance programs that include the services that
Millennium provides within a patient's annual deductible. Thus, Millennium advertised an illusory
benefit—and it was also illegal to waive those payments, so Millennium
allegedly got customers by falsely representing that this was legal.

Millennium also distributed an allegedly misleading press
release in which its CEO advocated for Medicare to reimburse healthcare
providers at a higher rate for drug screening, claiming that Millennium had no
vested interest in advocating for this change. In fact, Millennium’s motives were not
altruistic because such a change would make it money.

The other allegations described various schemes to encourage
providers to engage in unnecessary, duplicative, and otherwise illegal billing
and to suggest that these techniques weren’t illegal; among other things,
Millennium allegedly encouraged providers to invest in supposedly independent
labs that would forward samples to Millennium for additional testing.Providers had an incentive to choose
Millennium in the mistaken belief that its schemes were legal.

First, Millennium argued that it hadn’t engaged in “commercial
advertising or promotion” by disseminating its representations sufficiently to
the relevant purchasing public.Alleged
dissemination of billing letters to thousands of providers and, through them,
to thousands of patients was sufficient.As for the other representations, they were allegedly disseminated to
thousands of providers in several different states, which was also enough.

Falsity: As to the press release, Ameritox argued that it
was literally false to say “Millennium as a corporation has no financial stake
in this argument.” Given the allegation that Millennium's business model is
premised on generating increased revenue for healthcare providers partly through
Medicare reimbursements, the court agreed. Likewise, where Ameritox alleged
that Millennium represented that the conduct it was advocating “was in
compliance with federal and state laws” and was otherwise proper, that combined
will allegations that the conduct was actually illegal was sufficient to allege
literal falsity.

What about statements encouraging conduct but not explicitly
telling providers that the conduct was legal?Ameritox argued that these were false by necessary implication where the
conduct was, in fact, illegal.Though
the Eleventh Circuit hasn’t formally adopted the doctrine of falsity by
necessary implication, many other circuits have, as have district courts in the
circuit. So the question was whether the targeted audience would receive the
message “the conduct we’re advocating is legal” as if it had been stated.Ameritox alleged that consumers chose
Millennium mistakenly believing that its representations promoted legal conduct—and
that makes a lot of sense to me; while we’ve seen plenty of systemic
corruption, I at least want to believe that a pitch saying “let’s commit
Medicare fraud!” would have been received very differently.

Assuming that there was a necessary implication of legality,
Millennium argued that Ameritox hadn’t conclusively demonstrated illegality and
thus falsity.However, on a motion to
dismiss, the court determined that allegations of illegality were sufficient.

Similarly, Ameritox sufficiently alleged that the billing
letter misleadingly touted an illusory benefit, since some patients weren’t
required to pay for Millennium’s services in the first place.If Millennium actually didn’t charge co-pays,
then saying it wouldn’t seek payment from patients couldn’t be literally
false.But the allegation of implicit
falsity was sufficient.

What about deception or tendency to deceive?Ameritox sufficiently specified how consumers
were or were likely to be deceived: because of mistaken beliefs in the legality
and propriety of Millennium’s billing schemes.Also, literal falsity doesn’t require evidence of consumer deception,
and at the pleading stage, plaintiffs need not provide evidence of consumer
deception for misleadingness either.

Materiality: Ameritox alleged that the legality and
propriety of billing arrangements were material to purchasing decisions.That was enough on a motion to dismiss.The press release was different, but the
court accepted that providers could be, at least in part, persuaded to choose
Millennium because of a deceptive implication of Millennium’s magnaminity.

Millennium argued that its statements about legality or
propriety were non-actionable opinions.Statements by laypersons purporting to interpret law are opinion unless
a court or agency of competent jurisdiction has clearly and unambiguously ruled
on the matter at the time of the alleged misstatements.But Ameritox provided support for its
arguments that the practices discussed violated established law at the time of
the ads, with a combination of agency reports, statutes, regulations, and case
law.

Scalia and Garner ridicule a decision by the Supreme Court of Kansas (State ex rel. Miller v. Claiborne) that
held that cockfighting did not violate the state’s law against cruelty
to animals. They say that the court, in defiance of the dictionary,
“perversely held that roosters are not ‘animals.’” When I read this, I
found it hard to believe that a court would hold that roosters are not
animals, so I looked up the case. I discovered that the court had not
held that roosters are not animals. It was then that I started reading
the other cases cited by Scalia and Garner.

It's never a good idea to lose the trust of your audience, especially a federal judge.

After Church &
Dwight successfully attacked Clorox’s Fresh Step ads (settled before
resolution of the appeal), plaintiffs filed a putative nationwide class action
alleging that Clorox falsely advertised that (1) Fresh Step is more effective
at eliminating cat odors than products that do not contain carbon, and (2) cats
choose Fresh Step over these other cat litters.

The first relevant ads showed several cats jumping into a
Fresh Step litter box, after some of them examined and apparently rejected a
Super Scoop litter box.Supers said “dramatization”
and “based on lab tests,” while the voiceover said: “Cats like boxes. Big ones.
Little ones. And ones with Fresh Step litter inside. That's because Fresh
Step's scoopable litter with carbon is better at eliminating odors than Arm
& Hammer's Super Scoop. Fresh Step. Cats know what they like.”Then Clorox ran an ad showing cats opening
jars of cat food, unlocking doors, thwarting a dog from entering a house, etc.,
and finally choosing a box of Fresh Step over a box of Super Scoop. Voiceover:
“Cats are smart. They can outsmart their humans. Their canines. And locked
doors. They're also smart enough to choose the litter with less odors. That's
because Fresh Step Scoopable Litter with carbon is better at eliminating litter
box odors than Arm & Hammer Super Scoop. Fresh Step, cats know what they
like.”Church & Dwight’s study in
response showed that 6 of 158 studied cats rejected a Super Scoop box, while 8
rejected a Fresh Step box.

Clorox’s next set of ads kept up the playful theme, and
showed two beakers, one filled with a black substance labeled “carbon” and the
other filled with a white substance labeled “baking soda.” Green gas floated
through the beakers, rapidly dissipating in the carbon beaker but not reacting
much in the baking soda beaker.Voiceover: “That's why Fresh Step Scoopable has carbon, which is more
effective at absorbing odors than baking soda.” The super said: “Dramatization
of cat waste malodor after 1 day. Based on sensory lab test.”Church & Dwight commissioned an
independent lab to do a ten-day sensory study using people trained in odor
evaluation.On every day and overall,
the panel’s average rating for Church & Dwight’s baking soda-based litter
was lower (more palatable) than the average rating for Fresh Step.

Plaintiffs sued under the usual California statutes and, in
the alternative to a nationwide class, asserted consumer protection claims on
behalf of five subclasses in California, Florida, New Jersey, New York, and
Texas. They also brought causes of action for breach of express warranty and
unjust enrichment.

Clorox argued that the claims failed because they were based
on allegations that its ads lacked substantiation.Such claims aren’t cognizable under
California law when brought by private parties, though the law allows certain
government authorities to demand substantiation.Plaintiffs responded that their argument was
not that the claims were unsubstantiated, but that they were provably
false.The court agreed.Plaintiffs alleged that the two claims (carbon-based
cat litter’s greater effectiveness on odors than non-carbon brands, and cat
preference) were contradicted by scientific studies.This was more than an allegation that
scientific evidence in support of the claims was lacking.

Clorox also moved to dismiss the claims to the extent they
were based on the ads’ statements that cats “like” or “are smart enough to
choose Fresh Step.” Whether an alleged
misrepresentation is puffery, the court said, was a question of law that could
be answered on a motion to dismiss.(Always?That seems
unlikely.Or very confident.)Plaintiffs argued that claims that cats “like”
and “choose” particular litter brands are measurable.One of Church & Dwight’s studies measured
such preferences by looking at cats’ rejection of litter.Similarly, the ads themselves depict
preferences, thus allegedly giving the impression that the claims were based on
scientific testing.

The court agreed that the first set of ads conveyed a
preference message, but found that they provided no basis for the claim.“[T]he depiction of four or five cats
choosing to playfully jump into a litter box of Fresh Step rather than a litter
box of the competitor's brand does not give the impression of scientific
testing—especially since this demonstration follows several videos of cats
playing with boxes.”These ads didn’t
make quantifiable claims that could be proved or disproved; no reasonable
consumer would consider the message that cats prefer Fresh Step because they
are “smart enough to choose the litter with less odors” to be a statement of
fact.(The judge is not a cat person, I
see.If humans are smart enough to do
that, why not cats?)

The court also relied on the super, without assessing
whether consumers were likely to perceive it as part of the message (which I
would argue shouldn’t be done on a motion to dismiss anyway).The “dramatization” disclaimer undercut the
plaintiffs’ arguments, while “based on lab tests” “[had] the potential to cut
the other way,” but since the ads didn’t clearly identify which representations
were based on lab test, that didn’t help.The court thought “based on lab tests” was intended to convey “better at eliminating odors,” given its placement
against the voiceover.(Again, if it’s
not clear, why does that hurt
plaintiffs on a motion to dismiss?If “based
on lab tests” could plausibly refer to cat preference, that should matter at
this stage of the case.)

So the claims were dismissed to the extent they were based
on statements that cats “like” or “are smart enough to choose Fresh Step.”

Clorox next argued that plaintiffs failed to satisfy Rule
9(b) by failing to allege the content of the alleged misrepresentations, when
they saw them, or where. Without contesting that the fraud pleading
requirements applied, plaintiffs argued they’d met them, and the court agreed.Rule 9(b) has three functions: to provide
defendants with adequate notice/deter fishing expeditions, to protect
reputations against fraud charges, and to keep plaintiffs from taking up
resources on litigation without a factual basis.Here, requiring pleading of additional facts
wouldn’t advance any of these goals.The
complaint identified each ad on which the plaintiffs allegedly relied and
described their contents.It alleged
when the commercials aired and provided storyboards for each.Plaintiffs alleged that they bought Fresh
Step in reliance on the ads.That was
enough to put Clorox on notice and showed that plaintiffs weren’t on a fishing
expedition.Indeed, Clorox had located
and produced videos of the ads.

On to substance: Breach of express warranty under California
law requires a plaintiff to allege the exact terms of the warranty, reasonable
reliance thereon, and a breach proximately causing injury.Plaintiffs identified two alleged warranties:
(1) carbon-based Fresh Step is better at eliminating and absorbing odors than
baking soda-based cat litters, and (2) cats “are smart enough to choose”
carbon-based Fresh Step over baking soda-based cat litters. The second was
puffery and nonactionable.Also, vague
allegations about “product labels” couldn’t support the claim, since plaintiffs
didn’t specify what the labels said.But
the claim based on the first alleged warranty was properly pled.

Clorox argued that its statements weren’t actionable because
they were “highly subjective product superiority claims.”No, reasonable consumers are likely to
consider “Fresh Step ... is better at eliminating litter box odors than Arm
& Hammer Super Scoop” a statement of fact. This was neither “vague” nor
“highly subjective.” “Clorox identifies both a point of comparison—Arm &
Hammer Super Scoop—and a metric for comparison—elimination of cat odors.
Further, the beaker comparison depicted in the Second Commercials gives the
impression that this representation is based on the results of a scientific study.Clorox's apparent representation that this
beaker test is '[b]ased on [a] sensory lab test’ furthers this impression.”(The court also rejected Clorox’s argument
that there was no privity—there’s an exception when the consumer relies on labels
or ads from the manufacturer, and Clorox provided no warrant for the idea that
the exception is limited to written
warranties.)

Clorox also moved to strike the class allegations.Motions to strike are disfavored, but
occasionally granted when it’s clear that class claims can’t be sustained.Clorox said this was true here given Mazza’s holding that California's
consumer protection laws cannot be applied nationwide. But Mazza
was decided on a motion for class certification, not a motion to strike. “At
this stage of the instant litigation, a detailed choice-of-law analysis would
be inappropriate. Since the parties have yet to develop a factual record, it is
unclear whether applying different state consumer protection statutes could
have a material impact on the viability of Plaintiffs' claims. Further, unlike
the defendant in Mazza, Clorox has
not explained how differences in the various states' consumer protection laws
would materially affect the adjudication of Plaintiffs' claims or otherwise
explained why foreign laws should apply.”

Clorox contended that out-of-state plaintiffs lacked
standing to sue under California law.But California remedies can be invoked by out-of-state parties harmed by
wrongful conduct occurring in California. Plaintiffs alleged that Clorox
conducts substantial business in California and has its principal place of
business and corporate headquarters in the state, decisions regarding the
challenged representations were made in California, Clorox's marketing
activities were coordinated at its California headquarters, and a significant
number of class members reside in California. This was enough for purposes of
the present motion.

Via Evgeny Morozov, this Washington Post story about food coupons delivered with information from insurers offers a new marketing frontier--deployed here in the interest of better health, although the story notes that many of the products offered are second-best. "Dreamfields Pasta, a specialty item designed for diabetics, says it gets
double the redemption on coupons issued through Linkwell because it
puts them in the hands of patients who need to manage their blood sugar.
Other, more mainstream, brands such as Quaker Oats and Sargento get a
kind of halo effect because coupons for their product are packaged with
information from a health-insurance company." What would happen if a consumer sued, alleging that the products aren't healthy--how if at all could a court take account of this intended and expected halo effect?

CheckPoint brought a number of claims against Ray Guccione
and his company RAM Repairs, including trade secret/misappropriation, but I’m
just looking at the Lanham Act and coordinate state law claims. CheckPoint
sells chemical injection pumps and pump components.Guccione had various previous relations with
CheckPoint, including an employment relationship.After he left, he became managing partner of
RAM, which makes “Monkey Pumps” chemical injection pumps.It also initially acted as a third-party
repair business for pumps.

The court rejected Lanham Act claims based on RAM’s repair
activities: removal of CheckPoint identifiers when repairing CheckPoint pumps
and application of RAM stickers, and failure to use CheckPoint parts in the
repairs.The court allowed false
advertising claims to continue based on claims that Monkey Pumps were identical
to CheckPoint pumps.

Putting RAM stickers in place of CheckPoint identifiers
wasn’t reverse palming off.First, there
was no evidence that RAM sold, rather than repaired, the pumps, and the Lanham
Act requires sales.Separately,
repairing, rebuilding, or modifying a product at the request of the product’s
owner doesn’t violate the Lanham Act.(The
court doesn’t elaborate given the clear precedent, but it’s hard to imagine how
the owner could be confused; post-sale confusion apparently doesn’t come into
it.)The same principle applied to the
use of RAM parts to repair CheckPoint pumps.There was no false designation of the parts as CheckPoint parts; “RAM
labeled itself as the source of the repairs, not the originator of the pumps.”

The false advertising claims were based on statements such
as an email to a prospective customer: “RAM Repairs' trademark
Monkey Pump pneumatic chemical injection pump is identical to the CheckPoint
1250 Pump. Therefore, the replacement parts are identical and interchangeable.”There was evidence of falsity: defendants’
expert identified differences between the parts and found that some of the Monkey
Pump parts “appeared to be [of] slightly less quality” than CheckPoint pump
parts.

Tuesday, August 28, 2012

Anderson filed a putative class action asserting the usual
California claims, plus Magnuson-Moss Warranty Act claims, based on Jamba
Juice’s allegedly false representations that its smoothie kits were “All
Natural.”Jamba Juice moved to dismiss
and the court granted the motion in part and denied it in part.

Anderson alleged that the kits were prominently labeled “All
Natural” in all five flavors, and that this allowed Jamba Juice to charge a
price premium, even though the smoothie kits contain “unnaturally processed,
synthetic and/or non-natural ingredients: ascorbic acid, steviol glycosides,
xanthan gum, and citric acid.”Anderson
bought the Mango and Razzmatazz kits in reliance on the representations.

Warranty: Anderson alleged that “All Natural” was a written
warranty that the ingredients in the smoothie kits were free of a particular
type of defect (i.e., that they were not synthetic, artificial and/or otherwise
non-natural). The MMWA defines a
warranty as “any written affirmation of fact or written promise … which relates
to the nature of the material or workmanship and affirms or promises that such
material or workmanship is defect free or will meet a specified level of
performance over a specified period of time.”The claim here was based on “defect free.”The court found that “All Natural” was not a promise
of freedom from defect, but rather a product description.

Next, the court turned to Jamba Juice’s argument that
Anderson lacked standing for flavors he didn’t buy.The cases are divided, but the court was more
persuaded by Anderson’s argument that he had representative standing as long as
his claims were based on the same core factual allegations and causes of
action.Where there’s sufficient
similarity between the products, concerns over material differences can be
addressed at the class certification stage.There was sufficient similarity here between purchased and unpurchased
products—the same alleged misrepresentation was on all flavors.

Another opinion from the
apparently vicious battle between Taser and a competitor.Individual defendant McNulty moved for
partial summary judgment on some of the claims against him.Stinger issued press releases in January 2008
about Stinger’s patent reexamination request.McNulty argued that Taser hadn’t been able to show falsity; Taser said
that it did, and that in the alternative “truthfulness is not a defense to a
Lanham Act unfair competition claim.”(I’m just going to interpret that as “misleading statements are
actionable too,” argh.)

The first January press release was “Stinger Systems Request
Reexamination of Taser International's Intellectual Property,” subheaded “Large
Portion of Taser's Intellectual Property in Jeopardy.”It stated that the PTO was “currently
evaluating whether to reexamine” a Taser patent based on Stinger’s obviousness
challenge.The release claimed that the
consequence of Stinger’s then-pending lawsuit against Taser would be to
invalidate the relevant patent family on unequitable conduct grounds.It ended with a lengthy quote attributed to
McNulty offering his opinion that TASER “has not done a proper job of filing
these patents” and that the “the financial markets are under the misimpression
that Taser International has a patent monopoly on projectile stun guns.”The second press release defended the first
against charges that the first was misleading and the ensuing stock sell-off as
“an overreaction.” McNulty’s quote this time urged analysts to investigate
TASER's conduct and described the patent reexamination request as “quite
serious.”The third described the
statistical likelihood that patent reexamination requests cancel or amend
claims and quoted Stinger’s CEO as saying that “most law enforcement agencies
that Stinger personnel have called on strongly prefer the Stinger [product]
over the Taser X26.”“The release also
cited Stinger's lawsuit charging TASER with inequitable conduct, and again
implied that the family of TASER patents were at risk of invalidation.”

McNulty argued that the statements were true.He submitted that 94% of reexamination
requests are opened and, of those, 76% of reexaminations result in claims being
narrowed or cancelled.As a result,
there was a strong likelihood that Taser’s patent would have been narrowed or
cancelled.Moreover, Taser admitted that
one model embodied at least one invention claimed in the relevant patent,
allegedly jeopardizing the patent (this discussion is unclear on timing, but it
seems that the model came before the patent, at least if you accept McNulty’s
argument about continuances).And, since
a finding of inequitable conduct can invalidate a patent family, he argued,
three total patents were at risk of invalidation.

None of this showed as a matter of law that the press
releases were true or not misleading.“[I]t is plainly true that a reader of the three releases at issue here
would believe that TASER was on the brink of a serious collapse.” E.g., the releases said that Taser’s
intellectual property is “in jeopardy,” that Taser’s patents “may all be
invalidated if Stinger's argument in the case prevails,” that Taser’s patents “are
extremely narrow (and in some cases even farcical),” that Taser was “feeding”
misinformation to the financial markets, that Taser’s chair could only know
Stinger’s current sales pipeline if he violated security regulations and
announced insider information, that “[M]any departments currently using Tasers
have expressed interest in trading them in for Stingers,” etc.“This information encompassed in releases
issued in a span of three days could reasonably lead a reader to the conclusion
that TASER is in serious danger. Thus the Lanham Act analysis must begin with
the premise that the releases, regardless of their veracity, paint a dire
picture for TASER.”

The literal truth of some of the statements—Singer did file
a patent reexamination request—was not dispositive.Stinger initially failed to meet filing
requirements until March 2008, and in May the PTO denied the request for
failing to establish any “substantial new question of patentability.” Thus, the
reexamination request was apparently not “quite serious” in nature, and Taser’s
allegation that the request was filed merely to facilitate the issuance of the
press releases was consistent with its allegation that the Stinger lawsuit was
filed for the same purpose.

Further, McNulty didn’t meet his burden of showing that the
reexamination statistics in the releases were accurate—they appeared to be
based on old data (compare Millenium Import Co. v. Sidney Frank Importing Co.,
2004 U.S. Dist. LEXIS 11871 (D. Minn. June 11, 2004), finding reliance on old
data legitimate) and were “deployed in the releases in a manner that would
mislead a reader into believing that it is all but a foregone conclusion that
TASER's patents will be rendered invalid.”

The overall derogatory context mattered: Even if the
statistics were true, putting them alongside claims about Taser’s inequitable
conduct, quotes about Stinger’s superior products, and Taser’s poor corporate
governance “all support a Lanham Act unfair competition claim.”Likewise, even if the patent at issue claimed
an embodiment that already existed, “a consumer would understand the release as
jeopardizing much of TASER's patent portfolio,” especially since the releases
referred to a cancelled Taser patent for a nonlethal landmine and a patent “at
risk of cancellation” for nonpayment of fees, both seemingly unrelated to the
patent reexamination request.Misleadingness was for a jury to resolve.

McNulty also sought partial summary judgment about a January
2008 press release from Bestex.Taser
alleged that the Bestex release came from McNulty’s attempts to “broker a
fraudulent relationship between Bestex and LEA [another company] in an effort
to portray the two companies as entering in a business relationship, all with
an eye toward pushing the value of the companies up and damaging TASER's stock.”LEA rejected McNulty’s advances, but the
Bestex release allegedly misleadingly implied that discussions were ongoing,
almost a year later.The release
announced that Bestex would sell new stun guns to compete against Taser, “for a
fraction of the cost.”Bestex’s CEO
attacked a recent Taser press release for including “absolutely false and
misleading statements” and “absolutely outrageous and unprecedented”
statements. Specifically, the release labeled Taser’s statements that Bestex had
exited the stun gun market as false.(I’m missing something about how this brings LEA in, but there was
apparently something in there as well.)

McNulty argued that the press release could have related to
more recent discussions; deposition testimony from Feldman, representing LEA,
suggested that it was a “possibility” that there were discussions in early
2008.There was also a recorded
conversation between Feldman and McNulty (allegedly acting for Bestex) where Feldman
said that the press release was true, even if the timeline “isn’t really
exact.”The court found that there were
genuine issues of material fact.The
deposition was inconclusive, since Feldman couldn’t recall timing and other
evidence suggested that the discussions might have ended much earlier.And the recorded conversation was
“irrelevant” to whether the Bestex release was true or false, since it occurred
after the Bestex release was issued. (Does this mean it can be excluded?Somehow I doubt it.)“To the extent that the transcript discusses
prior Bestex and LEA negotiations, it is inconclusive as to when those
discussions occurred,” though the court gave “some weight” to Feldman’s
representations that he believed the Bestex release was true.

Anyway, there was a question of fact as to
misleadingness.The same recorded
conversation indicated that customers called LEA as a result of the press
release, believing that LEA was immediately entering the market.The Bestex release “also includes various
attacks against TASER, including that it should be ‘embarrassed and ashamed’ to
mention a case it had lost and that TASER's conduct was ordered unethical and
‘highly suspect.’”(I’m not sure why
that makes it more plausible to the relevant consumers that LEA and Bestex were
working together, but ok.) In context, the release could be misleading.

After
remand from the court of appeals, the court granted defendants’ motion to
dismiss.The district court initially
enjoined certain advertising by defendants (claims to have “odor eliminating
technology” for hunting clothing), but the court of appeals held that the
claims for equitable relief had to be dismissed.The only remaining claims were for damages
under the Minnesota Consumer Fraud Act (“CFA”) and the Minnesota Unfair Trade
Practices Act (“UTPA”). Under the
state’s private AG statute, individuals can bring consumer fraud claims, but
must show a benefit to the public.The
Minnesota Supreme Court previously held that a case about a fraudulent
one-on-one transaction didn’t meet the public benefit requirement.

Defendants argued that, at this point, there was no
remaining public benefit, just small claims for nominal damages.The court agreed, finding that it had to
evaluate the claims as they stood, not as originally pleaded.

Plaintiffs argued that the UTPA wasn’t subject to the same
public benefit requirement.And it was
true, the court conceded, that the UTPA, unlike the CFA, expressly authorized a
private cause of action for damages.But
that didn’t help plaintiffs, because they pursued remedies under the private AG
statute, not under the UTPA directly, which they did because the UTPA doesn’t
provide for attorneys’ fees and the private AG statute does.

Plaintiffs argued that they satisfied the public benefit
requirement because the misleading ads were distributed to the public at
large.The case law was not clear on
this; some cases concluded that public benefit was lacking despite the
allegedly false/misleading statements being disseminated to the public.The court didn’t think that an individual
bringing a small claim for the amount he lost on a deceptively advertised
product would benefit the public, even if the ad had been broadly
disseminated.(The court couched this as
a hypothetical, but since it’s the exact same facts as the current case minus a
few individual plaintiffs, I don’t see what’s hypothetical about it.)Public benefit requires examination of the
relief sought by the plaintiff.“[A]
public benefit typically will be found when the plaintiff seeks relief
primarily aimed at altering the defendant's conduct (usually, but not always,
through an injunction) rather than seeking remedies for past wrongs (typically
through damages). This is because individual damages, generally speaking,
merely enrich (or reimburse) the plaintiff to the defendant's detriment; they
do not advance a public interest.”Thus,
whatever public benefit existed at the outset of the case no longer existed,
since injunctive relief was out and plaintiffs failed to get class
certification.Nor would a potential fee
award alter the analysis, since it would likely be de minimis in this
case.

Plaintiffs argued that an award would benefit the public
through deterrence, but that would allow every “dog bite” case to come within
the statute’s ambit and was too remote a possibility to suffice.Anyway, even assuming that damages can
sometimes achieve a public benefit, they’d have to be adequate to deter, but
here the only possible award was in the tens or hundreds of dollars.The litigation was “‘so feeble that it is
best to end it immediately’” and was only ongoing because of the potential
fees.Anyway, even if this motion hadn’t
been granted, the court of appeals “strongly suggested” that the ads were
nonactionable puffery, and the district court likely would have felt
“constrained” to agree.

We report on the results of a
two-part study, including three online consumer surveys, and a coding study of
the results when 2,500 trademarks were run through three search engines.Consumer goals and expectations turn out to
be quite heterogeneous: a majority of consumers use brand names to search
primarily for the branded goods, but most consumers are open to purchasing competing
products.We find little evidence of
consumer confusion regarding the source of goods, but only a small minority of
consumers correctly and consistently distinguished paid ads from unpaid search
results.We also findthat the aggregate risk of consumer confusion
is low, because most of the ads triggered by the use of trademarks as keywords
are for authorized sellers or the trademark owners themselves.However, a sizeable percentage of survey
respondents thought it was unfair andinappropriate for one company to purchase another company’s trademark as
a keyword, independent of confusion as to source.

I have some quibbles with the interpretations, particularly
with respect to the control/distractor question about Google’s selection of ads
that isn’t really a control since a reasonable consumer might well think that
Google’s marketing department selects ads.Someone who selected that “control” to classify a link seems likely to understand that the
link is there because Google hopes to get paid for it, even if they’re confused
about conscious/case-by-case selection.Adding those responses to the “paid advertising” responses changes some
results significantly.I also have
doubts about the analysis suggesting that “people think X is unfair” means
“people want a law against X” or even “there ought to be a law against X.” Nonetheless, it’s valuable empirical work that
should be much cited.

This case raises interesting questions of falsity and
materiality.Ordinarily there’s no cause
of action just because a trademark owner changes the quality of its product,
but here the former producer for VS argues that the changed product is falsely
advertised by the unchanged packaging (and consumers’ expectations about the
product based on past experience).I
doubt that will go anywhere, not least because of the standing/noncompetitor
problem.If it did, I would also ask
about materiality: suppose the product in the picture and the product delivered
are in fact different in durability/quality, as alleged.Such differences are surely material—but
would consumers know about them?In
other words, would a court require evidence that consumers expected a certain
durability/quality based on the picture?I ask because only one of the alleged differences seems really visible
in the pictures of the packaging shown in the complaint: the slipper heel
(which seems not to be present in this nearly
identical picture from VS’s site).

If VS could get it done, I’d suggest a survey with pictures of equally
sexy models showing off the new versions; assessing purchase intentions from
groups shown each package would likely be a defendant-favorable way of
measuring materiality.

Monday, August 27, 2012

Sidense and Kilopass compete in “the emerging market for
‘1T’ one-time programmable embedded non-volatile memory (‘eNVM’),” which allows
permanent data storage inside integrated circuits by creating a breakdown in
the transistor.Kilopass separately sued
Sidense for patent infringement as well as some business torts.

Sidense alleged that Kilopass and individual defendant Cheng
embarked on a campaign of false claims in order to harm Sidense.Sidense alleged that these statements
variously constituted defamation, false advertising, intentional interference
with contractual relations/prospective economic advantage, and violations of
California’s UCL.

Defamation: Sidense first challenged a statement to a
Sidense potential customer that, based on Kilopass' own tests, Sidense's 1T
technology was not commercially viable. The court expressed uncertainty about
whether the statement referred to Sidense.Sidense’s argument was that, though Kilopass claimed to have patents
covering 1T, it was trying to sell the recipient, Samsung, on its 2T
technology, and both Samsung and Kilopass knew that Kilopass was competing
against Sidense’s 1T technology.The
statement began with a statement that “reliability and manufacturability should
be compared with our competitors.” Indeed, Kilopass sent another message to
Samsung the next day about Sidense’s patent application.Kilopass, though, argued that it was talking
about its own 1T technology.

The court found that the statement wasn’t defamatory.It was evaluative, not a false statement of
fact: “The statement that a type of technology is not reliable or
manufacturable in high volume production, as drawn from a company's evaluation
of that technology, is too subjective and vague to be subject to a defamation
claim.”Plus, Sidense’s evidence of
truth was its success in the years after
the message was sent, which wasn’t available to Kilopass at the time.

The next claim involved the statement “Sidense continues to
offer for license even after May, '08, knowing substantial portion of its
patent claims have been rejected.Sidense argued that, seven months before this claim was distributed, the
PTO affirmed all the claims in its patent and allowed new claims to be added during
inter partes reexamination initiated by Kilopass. Kilopass argued truth because
the original application had 29
claims, the majority of which were rejected. The court agreed that this was
subject to a defamatory meaning, since it was in the present tense: “The most
credible inference to be drawn from the statement is that Sidense continues to
market and license technology to which it holds no patent.”It wasn’t libel per se (an accusation of
fraud on customers), because the “innuendo” that Sidense continued to license
products based on rejected claims was “subject to the reader's interpretation,”
requiring Sidense to show special damages.(It seems to me that the court is importing the explicit/implicit
distinction from false advertising law; this doesn’t seem consistent with the
business defamation cases I’ve read, though admittedly I haven't made a detailed study.)

Next, Kilopass threatened to sue Sidense’s customers and
potential customers as patent infringers or respondents before the ITC,
including threats to Fujitsu and Sony.Kilopass
argued truth: in reponse to the patent suit, Sidense disclaimed direct
infringement since all it does is license its technology.Thus, Kilopass reached out to alleged direct
infringers, and contended that it had made preparations to file potential
lawsuits against Sidense’s customers, including testing chips from
customers.The court agreed that these
statements weren’t subject to a defamatory meaning: whether Kilopass ultimately
sues likely depends on the outcome of its current suit against Sidense, and
Sidense didn’t raise a question of fact as to Kilopass’ intentions.

Matters were different with respect to the next set of
statements, from an email sent to several Sidense customers stating that Sidense
“has refused to take responsibility for its customers' chips that contain the
embedded Sidense OTP.” This email was sent after Kilopass subpoenaed 52 of
Sidense' customers in order to obtain evidence of direct infringement. It continued: “With Sidense indicating to the
court that it is its licensees who should be charged as direct infringers,
Kilopass had no choice but to send out the subpoena to all Sidense licensees.”

Kilopass argued that this was true, or at least opinion:
because Sidense hadn’t stipulated to direct infringement by its customers if
the products are found infringing, it was “refus[ing] to take responsibility,”
and “Sidense [is] indicating to the court that it is its licensees who should
be charged with direct infringement,” was a fair and reasonable interpretation
of Sidense's posture in the patent litigation.

The court wasn’t having it.Arguing that one isn’t a direct infringer isn’t the same as refusing to
take responsibility for customers’ use of the licensed technology, and
certainly doesn’t suggest that licensees should be charged with direct
infringement.Even more so here, where
Sidense offers indemnification to customers (which Kilopass recognized
elsewhere, using it as evidence of Sidense’s financial troubles).The defamatory sting was that “Sidense
abandoned its customers in the face of a patent infringement suit.”But the court found that it wasn’t libelous
per se; an understanding of the defamatory nature of the statement,
specifically what “taking responsibility” means in this context, “requires at
least some understanding of extrinsic facts, including the nature of direct
versus indirect patent infringement lawsuits.”

The next set of statements charged that Sidense was not
financially stable, that it would soon be bankrupt, etc.For example, in an email to a potential customer,
Kilopass stated that “Sidense has also alleged that its licensees are the
direct infringers (if/when proven). When coupled with its possible bankruptcy
filing, it has motivated us to seek direct resolution with licensees now ...”

Kilopass argued truth, with evidence that Sidense has
operated at a loss every year since 2006, bolstered by Sidense’s unlimited
indemnification against claims of infringement for use of its technology, which
allegedly “create[s] a high-risk profile for any business.” (It’s true because I made it true, your
honor!)In the alternative, Kilopass
argued that this was just opinion.

The court disagreed.Kilopass had no personal knowledge of Sidense’s finances, and the fact
that a startup operates at a loss doesn’t mean it’s facing bankruptcy.And, while generalized statements about a
competitor's future financial conditions are not actionable, statements
insinuating imminent financial collapse are.

Sidense alleged false advertising under the Lanham Act with
respect to two statements: first, the white paper allegedly depicting Sidense’s
product as if it were Kilopass’.The
paper stated, “Kilopass was the first to pioneer [technobabble]. Kilopass holds
patents for several flavors of the cells, including the 1T and 2T,” followed by
two illustrations labeled “Antifuse Bit Cell–2T” and “Antifuse Bit Cell–1T.”
Sidense alleged that, though this statement implied that the bit cells were
both Kilopass' patents, the 1T illustration actually depicted Sidense's 1T bit
cell. Thus, people familiar with the Sidense product allegedly would have
thought that Sidense's bit cell was merely a copy of the Kilopass bit cell and
was an infringer.

Kilopass argued that the illustration was, in fact, one of
its own bit cells.The court found that
Sidense raised a question of fact as to what product was shown.But there was no evidence that this actually
deceived or had the tendency to deceive a substantial segment of the audience
or that it was likely to influence a purchasing decision, and thus no evidence
of injury.It was not reasonable, absent
other evidence, to infer that people looking to select a vendor would (1) read
the white paper off of Kilopass’ website, (2) think that Sidense’s bit cell was
covered by Kilopass patents, and (3) therefore hesitate to choose Sidense.Without evidence, the court wasn’t willing to
infer that customers would recognize Sidense’s technology from the image, think
that Kilopass had a patent that covered Sidense’s technology, and decline to
license Sidense’s technology based on that belief.

Sidense also argued that the “Sidense continues to offer
licensing despite rejected claims” statement was false advertising.Kilopass argued that the PowerPoint in which
the statement appeared wasn’t commercial advertising, but instead an internal
education document used to “educate Kilopass' internal sales and marketing team
and inform a few select customers on the status of the litigation so that they
could be better equipped to handle questions from their customers.”It also argued that the statement hadn’t been
shown to be deceptive or material.The
court rejected these arguments: the relevant market is small enough that
statements to a few are enough to constitute commercial advertisement.Also, Sidense created a fact issue on
deceptiveness and materiality.It
provided an email who saw the presentation and was concerned

that Sidense is “still selling their IP ever [sic] after
knowing substantial portion of its patent claims have been rejected.”The email asked “Would you please confirm
whether there is still on-going or close to be done issue with Sidense? If they
are going out of business, we all need to be careful.”While the statement wasn’t libelous per se,
it had a “tendency to deceive and lessen goodwill, as it may suggest that
Sidense is licensing technology it does not have ownership in.”

Some of the same allegations—the “still licensing despite
rejected claims,” “going out of business/facing bankruptcy,” and “not taking
responsibility/told the court that its customers should be sued” ones—also
formed the basis of Sidense’s claim for intentional interference with
contractual relations.

The Kilopass email to Sidense’s customers about Sidense’s
financial viability also discussed “converting” the licensees to Kilopass
customers.The email asked for an
official letter stating that the recipient wasn’t using its Sidense license,
because “unfortunately we are likely to initiate litigation against Sidense
licensees, and we like to get this clarification so we can close the matter
with you.”Further, it said, “Sidense is
attempting to name its licensees as ‘direct infringers' as it only licenses the
GDS database.… Recently, due to concerns over Sidense viability, we have no
choice to [sic] turn our attention to the licensees. It's been a difficult
process and I am looking forward to finishing the conversion of licensees.
Fortunately, we've done three and several others in discussion. It's a long
road though.”This was enough to create
a question of fact precluding summary judgment.Sidense also submitted evidence that three customers renegotiated their
contracts to require limitless indemnification; this also created a question of
whether Kilopass actually disrupted the licensing agreements.

However, statements made to Samsung while the parties
competed for Samsung’s business didn’t constitute intentional interference with
prospective economic advantage—these were the statements discussed above that
the 1T tech wasn’t reliable or suitable for high-volume manufacturing, and
since they weren’t defamatory they also couldn’t support an intentional
interference claim.

Mycone, aka Keystone, sued defendants CND and some others
(distributors) for patent infringement, false advertising, and various state
law claims.

Keystone alleged that it invented “a substantially acid-free
nail coating that forms a strong protective bond with the fingernail in a
toxicologically and dermatologically safe manner,” which is patented and
promoted as GEL POLISH in three varieties: base, color, and top coats.CND’s sales of SHELLAC nail polish products
allegedly infringed Keystone’s patent.Further, Keystone alleged, CND’s marketing falsely claimed that CND
created and owned the substantially acid-free fingernail coating technology with
claims including “revolutionary, new hybrid color service for nails,”
“breakthrough, patent-pending UV3 technology,” “[a] true innovation in
chip-free, extended wear color,” and “game-changing product.” This also allegedly violated the New Jersey
Fair Trade Act’s prohibition on “appropriating for [a defendant’s] own use a
name, brand, trade-mark, reputation or goodwill of any maker in whose product
such ... corporation deals.”

Rather than addressing the Dastar issue, however, the parties fought about the pleading standard.Some district courts in the Third Circuit
have applied an intermediate pleading standard for false advertising
claims.This court thought that this
“heightened” or “intermediate” standard might be identical to the Iqbal/Twombly standard.But in any event, Keystone satisfied the
standard.

CND argued that Keystone didn’t plead why CND’s statements
were false.Even if it were infringing
Keystone’s patent, that wouldn’t prevent it from being true that CND
independently developed Shellac, or that Shellac was unique, or that CND filed
patent applications for its system.The
court considered these all to be possible defenses, but not something Keystone needed
to disprove at this stage. “The Court assumes, as it must at this procedural
posture, that Keystone's patent is valid and enforceable, that Keystone created
and patented these unique nail technologies and, therefore, that any statement
that CND created or brought them to the market is false.”Keystone also didn’t need to include precise
allegations of date, time or place.It
provided sufficient specificity about whether this was commercial
advertising by attaching examples of the statements to the complaint and, at
oral argument, offering statements from CND's marketing brochures, website, and
Facebook page.

The parties agreed that the New Jersey state law claims
tracked the Lanham Act claims (though the court noted in a footnote that it
wasn’t entirely clear that this should be true of claims “revolv[ing] around
patent infringement and false advertising,” without allegations of trademark
infringement).

However, Keystone didn’t properly allege false advertising
against the distributors.Though it
alleged that they advertised that they were dealers for CND, there were no
allegations that they made false statements.Keystone argued that the distributors engaged in “misappropriation” and
use of the patented invention, but that wasn’t sufficiently detailed to make
out a facially plausible claim.

The unjust enrichment claims were also dismissed because the
parties didn’t have a direct relationship, as required in New Jersey.

Thursday, August 23, 2012

One question on many minds after Tiffany v. eBay was whether eBay's anticounterfeiting policies were necessary to the result, or whether an intermediary could be less TM-owner-friendly and still escape liability. Though this is an intermediate state court ruling, it is also the most extensive description of an alternative policy--one with some apparent communication delays--that I've seen, and thus may be a useful signal of what courts are likely to do with entities they perceive as acting in good faith.

Tre Milano appealed from an order denying a preliminary
injunction against Amazon, and the court affirmed.Tre Milano sells the InStyler Rotating Hot
Iron Hair Straightener; Amazon offers InStylers on its website, some that are
from third parties and are counterfeit.Tre Milano sued Amazon and some third party sellers, seeking damages and
an injunction barring Amazon from selling any “purported” InStyler products in
California or, in the alternative, from selling “counterfeit” InStylers.InStyler is popular enough to counterfeit,
and Tre Milano has in-house and outside personnel looking for counterfeiters,
along with a manual, “How to Tell It's Counterfeit.” But a typical consumer, without the manual or
a side-by-side comparison, couldn’t identify a counterfeit product.

Amazon sells from its own inventory, from third parties “fulfilled
by Amazon” and shipped from its warehouses, and from the Amazon Marketplace;
the last category is sold and shipped by third party sellers.Amazon identifies which is going on for each
particular sale, though the sales process is the same regardless, including
payment made through Amazon.

Amazon takes anti-counterfeiting measures in order to
protect the buyer experience and avoid claims and chargebacks.Among other things, it bans “Replicas of
trademarked items.The sale of
unauthorized replicas, or pirated, counterfeit, and knockoff merchandise is not
permitted.”It employs over 100 people
in “risk investigation,” which includes identifying counterfeits.Over the last 2 1/2 years, Amazon blocked
about 5900 sellers for suspected infringing content, about 75% from Amazon’s
own work and the remainder after a Notice of Claimed Infringement (NOCI), a
Digital Millennium Copyright Act (DMCA) notice or a customer complaint.“In the last year, Amazon has canceled over
4 million seller listings.”

When Amazon identifies a problem or receives a NOCI, its
team follows set procedures.If the team
decides that a listing is for an infringing product, Amazon may block the
listing or block the seller; the latter also means a bar on opening a new
account.“However, if an infringing
seller has a good relationship with Amazon and positive customer feedback,
Amazon may just block the listing and issue a warning.”Amazon tries to act within 24 hours of a
NOCI, and generally does so within 48 hours.“If there is no supporting evidence, Amazon will review the seller's
profile to determine whether there is a probability the NOCI is accurate.If there is a probability of accuracy,
Amazon will block the seller or remove the listing and warn the seller.If there is little probability of accuracy,
Amazon will ask the sender of the NOCI for evidence to substantiate its claims.”

Amazon also screens applicants to become third-party
sellers.It monitors their monthly
sales; if they reach a certain “sales velocity,” Amazon reviews the seller to
make sure it’s shipping on time and complying with Amazon’s policies.In addition, Amazon has a database that
tracks high risk items—those likely to be counterfeit.Computer programs monitor third party offers,
flag potentially counterfeit or high risk listings, and scan feedback for
keywords such as “counterfeit,” “fake,” or “open box” to flag sellers for
review.

In November 2009, Tre Milano’s attorney bought an InStyler directly from
Amazon, and determined that it was counterfeit.She contacted Amazon’s legal department with a C&D.A legal representative “acknowledged that
Amazon was having trouble with its inventory being mixed with that of third
parties in its facilities.”At Amazon’s
request, the lawyer sent an InStyler reference guide to the legal
department.In December 2009, the
lawyer bought two more InStylers from DAB Nutrition, fulfilled by Amazon, and
again found them to be counterfeits.Amazon’s associate general counsel stated that Amazon did not maintain
its own inventory of InStylers but sold products from the inventories of third
parties who maintained inventories at Amazon facilities, that Amazon did not
control the supply chains of these third parties, and that Amazon had no
definitive ways of determining whether their InStylers were authentic or
counterfeit.Tre Milano’s attorney sent
numerous NOCIs from November 2009-February 2010.

Tre Milano also used software to scan various internet
sites, including Amazon, for counterfeits.Its compliance coordinator reviewed the flagged items and sent
infringement notices when they appeared to be counterfeit.From May 2010 through April 2011, Tre Milano
sent 311 NOCIs to Amazon, 226 for first-time listings and 85 following up on
listings not removed after a previous NOCI.This included duplicate NOCIs when Amazon failed to respond.

In March 2011, Tre Milano sent a NOCI identifying 11
listings, including one from Success Store.Shortly thereafter, Pete Day purchased an InStyler from Success Store
using Amazon.In April, Day’s wife was
using the product and it exploded at the point where the electrical cord
entered the product; she was injured.Tre Milano identifed the product as a counterfeit based on its serial
number.Tre Milano also bought from several
other sellers it had sent NOCIs for and identified their products as counterfeits;
it sued some of them.One defendant also
sold under different names on Amazon.For another, Tre Milano sent a NOCI in March, bought a counterfeit in
May, and still saw the seller offering InStylers on Amazon in June.“In the course of this litigation, Tre Milano
sought contact information for Amazon Marketplace sellers whom Tre Milano
believed were selling counterfeit InStylers.Much of the information provided by Amazon was inaccurate.”

Amazon described its response to NOCIs.Its Copyright Compliance Officer, reviews
NOCIs, and if a NOCI “appears sufficient and legitimate,” he forwards it to
Amazon's investigators to remove the listing and determine what action to take
against the seller.If a NOCI does not
provide sufficient information, Amazon asks the sender for specific
information, including “[p]roof of the violation,” which includes an
“Amazon.com Order ID of a test buy that confirms the violation.”He stated that “[w]hile a handful of [Tre
Milano’s] notices have contained evidence or some explanation of why Tre Milano
claimed that a listing was for a counterfeit item, the vast majority have
contained nothing but a statement like ‘the item is a counterfeit product that
infringes the trademark owner's rights' ... or ‘the item is an unlawful replica
of a product made by the trademark owner’....As I have explained to Tre Milano, Amazon.com needs more evidence
regarding the alleged infringement before it can assist Tre Milano in carrying
out our common goal of preventing the sale of counterfeits.”Without a test buy, he believed, Tre Milano’s
notices were based only on the offering price, and Amazon is reluctant to
accuse sellers of counterfeiting on the basis of price alone without other “objective
indicators” of infringement.He also
stated that Tre Milano had sent numerous erroneous NOCIs and recanted many of
them.During June 2010-April 2011,
Amazon received 159 NOCIs, but in 41% of the cases Amazon had already taken
down the listing before the NOCI was processed.(This doesn’t seem like the same thing as an erroneous NOCI to me, but
perhaps the court is just recording two separate facts.)Amazon didn’t have any InStylers in
inventory, but had still “issued specific instructions that any future inventory
of InStylers belonging to Amazon.com is to be kept segregated from any
inventory belonging to third-party sellers for Fulfillment By Amazon.”

The court then turned to differences between Amazon and
eBay: Amazon sells its own products along with third parties’; it may provide a
single generic product photo; products may be shipped from Amazon; Amazon
handles all payments, instead of having payment arranged between buyer and
seller (though given PayPal, I don’t know how much of a difference that really
is).Tre Milano participates in eBay’s
VeRO, which allows allegedly infringing listings to be taken down almost
immediately and allows Tre Milano to get seller information on request.Amazon, by contrast, doesn’t have an API by
which rightsholders can claim infringement, but instead allegedly takes 1-2 weeks
to respond to Tre Milano’s NOCIs, and sometimes that stretches to months.

Among the harm Tre Milano suffered, it claimed was “a large
number of negative reviews from Amazon customers who purchase counterfeit InStylers®
and then give ‘1-star’ reviews on the product page as if they were reviews of
the genuine InStyler®.”These reviews
stem from the poor quality of the counterfeits—which also pose risks of injury
to consumers.Along with the incident
detailed above, there was a negative video review of the InStyler from AOL, but
it showed a counterfeit; Tre Milano contacted AOL, which removed the review,
stating: “Unfortunately, we bought our product from a reseller on Amazon that
we have now learned may be selling counterfeit goods.While that reseller was rated highly on
Amazon at the time that we purchased the InStyler, that reseller has since shut
down.Apparently, there are a number of
other sellers still engaging in this practice and we want to pass along this
word of caution about fake InStylers.”

Typical of the negative reviews was one that said that the
seller “sent me a thing that looked like an InStyler, it was the exact thing
but BOOTLEG!!!![I]t was a fake.It was much fatter and a lot of plastic and
it made a pop sound on the first try an[d] didn't work.I thought it was a real instyler [sic ]
until I actually purchased one from ULTA. I noticed it wasn't.It was a rip off.”Eric Goldman will like this: In response,
another reviewer wrote:“There is
another place for you to review the seller.This is not it.This is for
reporting on the quality of the INSTYLER.”A third wrote:“I agree this
makes the ratings of the real product go down.Why not rate it based on the one you bought at ULTA?”

So, was Amazon liable as a direct infringer under the Lanham
Act?(There’s an interesting side note
here about Amazon’s decision not to remove.Especially if I got a sense that the state judge assigned to the case was
decent, I too might have decided not to find out which station the Ninth
Circuit’s ticket went to for my case.)

The trial court ruled that Tre Milano had failed to show
that Amazon was under a duty to affirmatively police counterfeit sales on its
site; Amazon was not selling the goods itself but only facilitating their sale.It relied on Tiffany v. eBay.The court
of appeals recounted eBay’s extensive anticounterfeiting efforts in detail,
then explained that the Second Circuit found eBay not liable for direct or
secondary infringement.(Following on my
earlier aside, I understand why the California judges preferred to use somebody
else’s—anybody else’s—secondary liability standards.)

Tre Milano argued that Amazon was a direct infringer because
it used the InStyler mark “in connection with” the sale of counterfeit products,
and that was enough regardless of whether the use was part of the sale, the
advertising, or the distribution.Except
that Tiffany held that a service
provider’s use of a mark to describe a product was protected by nominative fair
use.At least as to the InStyler, Amazon
was the service provider, not the seller; all InStylers it currently sold
belonged to third parties.It wasn’t a direct
seller even though it provided the product description and handled the
payments.(A slightly odd way to
describe the role of nominative fair use,but ok!If they’re actually
InStylers, anyone—including but not limited to a mere service provider—is free
to describe them as such; the real point is that Amazon lacks sufficient
connection to the sales to be deemed a direct seller.)This also disposed of Tre Milano’s argument
that it was infringing to use the mark on the InStyler product page: eBay took
similar action in using Tiffany’s mark on its website and in sponsored links.Put simply, Amazon was not a retailer, but
rather a “transactional intermediary,” and was not directly liable.

Contributory infringement requires that Amazon continued to
supply its services to one who it knew or had reason to know was engaging in
trademark infringement, and that it had direct control and monitoring of the
instrumentality used by a third party to infringe.Willful blindness will suffice for knowledge.Generalized knowledge of counterfeit sales on
the site, however, is insufficient.

The evidence showed that Amazon continued listings of
suspected counterfeit InStylers after receiving NOCIs identifying specific
sources of suspected counterfeit InStylers.But the majority of NOCIs simply claimed that the listing was
counterfeit with no supporting evidence.And such NOCIs were not themselves proof of infringement.Just as it was ok for eBay to remove a single
listing and not (as Tiffany requested) permanently suspend a seller whose listing
received a NOCI, it was ok to have an investigation policy rather than an
automatic removal policy in response to a NOCI.Thus, “substantial evidence” supported the trial court’s determination
that Tre Milano failed to show that it was likely to prevail on the merits.When Amazon received evidence of infringement, it acted to remove infringing listings.

What about the harm to Tre Milano, which had to be balanced
against likely success?It was clear
that Tre Milano was harmed by counterfeit sales.But its own evidence also showed that Amazon
customers were able to ID the products as counterfeits and pass the information
along to other customers.Denial of
preliminary injunction affirmed.

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